Traditional Strategies
“Traditional” fund management consisted mostly in buying or selling some specific security in the market and putting (borrowing) some money in (from) a bank account at a given time and holding it during a long period, typically years. This technique is sometimes referred to as “buy and hold” technique since it merely consists in buying and holding some predefined security during a certain time.
As a result, the value at the end of the investment period T of a fund managed thanks to a “Buy and Hold strategy” can be represented as an affine function of the value of the underlying security at the same date. Portfolio 1 in FIG. 1 is the graphical representation of a strategy consisting in borrowing $ K2 from a bank and buying α1% of the fund value of S&P 500. On another hand, Portfolio 2 displayed in FIG. 1 is the graphical representation of a strategy consisting in putting $ K2 in a bank account and of selling α2% of the fund value of S&P 500.
The final value of such strategies is sometimes referred as its “payoff”. The set of payoff of Buy and Hold strategies is all possible affine functions.
Modern Strategies
In between 1970 and 1990, path breaking works in financial theory documented properly the fact that moving from Buy and Hold strategies to continuous trading could generate a much wider variety of “payoffs”. More specifically, thanks to continuous trading between two dates, it has been shown that it was possible for a Mutual fund to provide to investors such wide range of payoff. The more famous payoffs are displayed in FIG. 2. Most distinguished contributors of such “discovery”, professors Black, Merton and Scholes were awarded the Nobel Prize in 1997 “for a new method to determine the value of derivatives”.
It can be shown that combining above “payoffs” can lead to portfolios with a terminal value that can be whatever function of the terminal value of a specified underlying security.
The problem with this approach is that such payoff can be obtained only if a specified investor starts the strategy at a precise point in time t0 and stops trading at a specified point in time t0+T, as shown in FIG. 3 where the entry point and the redemption point are fixed points. In other words, it means that, a fund manager cannot pull different investors interests and has to launch different funds depending on when investors are ready to invest their money.
Therefore, the purpose of the invention is to find a fund trading mechanism that could open the possibility to pool different investor's interests at different point in times. In other words, the purpose of the invention is to create a trading automat that could perform this operation in between whatever entry date t and exit date t+T as shown in FIG. 4, thereby allowing fund managers to deliver a specified payoff between different dates instead of launching as many different funds as would be needed.